Income matters. But… don’t let it be the tail that wages the dog of your returns.
First… I’ll explain why it matters – and where you can find the highest-yielding markets in the world. But don’t forget the cardinal rule of investing for income.
Don’t diss income
If you’re a speculator who’s aiming for a 300 percent gain on a hot stock tip, then (some investors would argue): Who cares about a measly 3 percent dividend?
If you can consistently – that is, over an investment lifetime – generate enormous capital gains regardless of market conditions… then congratulations, you’re in the top 0.0001 percent of all investors in history. And income wouldn’t matter much.
But if you’re a mere investment mortal like the rest of us, dividends are probably critical to your returns – thanks to the magic of compounding.
Let’s say you invest a sum of money that generates a steady return. But instead of taking that return and spending it, you reinvest it by buying more of the original investment. The next year both the original investment and the reinvested interest will earn interest, which you again reinvest.
With compounding, your original investment is growing in size due to repeated reinvestment, and every year you are getting a larger and larger sum of interest. It’s like a snowball rolling downhill, growing bigger in size as it picks up more snow on the way. (We wrote about this here.)
Compounding is why investors who opt to re-invest their dividends, rather than pocket the income, will have far better investment returns.
These are the highest-yielding markets
As you can see in the chart below, Pakistan (a 5.7 percent yield), Russia (5.6 percent) and the United Arab Emirates (4.9 percent) are the three highest-yielding markets in the world. The MSCI Asia ex-Japan index offers a yield of 2.5 percent (Singapore is at 4 percent and Hong Kong has a yield of 3.3 percent). The S&P 500 trails with a lousy 1.9 percent yield.
So if you’re looking for high-yielding stocks, start your search in Pakistan, Russia the United Arab Emirates and Asia.
You can look at ETFs like the Global X MSCI Pakistan ETF (NYSE; ticker: PAK), Vaneck Vectors Russia ETF (NYSE; ticker: RSX), and the iShares MSCI UAE ETF (Nasdaq; ticker: UAE).
Asia has the most
If you’re looking for the regions with the most dividend stocks, look to Asia.
As you can see in the chart below, there are 326 stocks from the Asia Pacific ex Japan region (that are part of the MSCI All Country World Index) that yield greater than 3 percent. Europe has just 227… and the U.S. has just 149.
But yield isn’t everything
The ability of a company – or, more broadly, of a market – to sustain its dividends depends on several factors: earnings, free cash flow and debt levels. These factors can change dramatically year over year, quarter over quarter.
And – this is the dangerous part – what happens if a market drops, or the share price of a high-yielding stock drops? It doesn’t take much of a decline to erase the gain you’ll make from making 5 (or so) percent in dividends.
For example… PAK (the Pakistan ETF) is down around 40 percent over the past year. The fund’s 4.5 percent yield barely makes a dent in that. If you’d been drawn to PAK by its dividend, you’re hurting now.
Brian wrote about something similar with China Mobile (Exchange: New York; ticker: CHL)… you can read more about the red herring of dividends here.
Dividends matter, but…
In short, you shouldn’t buy a market or a stock for dividends alone. Compounding is fantastic – but if you’re buying a stock that’s declining in value, the dividend will only dampen the damage.
Publisher, Stansberry Pacific Research